What's a balance transfer?
Whether you’ve had a credit card for a while, or you’re currently searching, you'll most likely have come across the phrase ‘balance transfer’ - but what does it mean? A balance transfer is where you take your existing outstanding balance and move it to another credit card with a lower rate of interest (often 0%) for a certain period of time.
Why do a balance transfer?
In essence, doing a balance transfer can save you money in the long run as you’ll cut down the amount of interest you have to pay, especially if you’ve been able to get a 0% interest offer. So, for example, you’ve built up quite a balance over the festive period and will now have to pay 20% interest. These monthly repayments might work out to be quite high as you want to pay off the balance, not just the minimum or interest only. Moving the balance to a 0% card means that you won’t pay that interest until the introductory 0% period is over.
Some credit cards like the Halifax Balance Transfer and Purchase Credit Card have an interest-free period of over two years. You can also use balance transfers to consolidate a number of small credit or store cards. By moving the outstanding balances to one monthly repayment, you’ll cut down the amount you’re paying in interest, especially if you’ve managed to get a good 0% interest deal.
What’s the catch?
You may think that this is too good to be true, but be aware there are a couple of things to watch out for if you are considering a balance transfer.
Fees: Most credit card providers will charge a fee for transferring the balance to them. This is usually around 3% of the total you’re looking to move, so make sure you budget for this. There are some providers who have a fee-free introductory period, so it’s worth moving your money quickly once you have been accepted. If these fees outweigh the savings you will make on interest then it’s probably best to stay put.
Being accepted: If you want to get the best deal, then you will need to have a virtually spotless credit file. So make sure you search for a credit card that meets your personal and financial circumstances before applying.
Switching within the same group: Take note of your current credit provider and the banking group that they belong to. Some groups won’t allow you to do a balance transfer to a credit card that belongs to another bank within the same group. Research this properly before applying by checking the terms and conditions of the card thoroughly.
Your new credit limit: When applying to a credit card provider for the first time, they might give you an initial lower credit limit than you currently have. Most providers also only allow you to do a balance transfer of up to 90% of your new limit, so if the outstanding balance is more than this, then you could get in trouble down the line and have to pay off two cards.
Watch out for purchase rates: Although you may have got an interest-free period on your balance transfer, it doesn’t necessarily mean that you’ll receive this on purchases as well. Check the rate of interest for this type of transaction, as once you start using your new credit card to buy things, you could be stung with a higher rate of interest than you were paying originally.
A word of warning
As with all types of credit, moving your credit around too much or making too many applications can actually have a detrimental effect on your credit score. So shop around on Choose Wisely for a card that you are almost positive that you will be accepted for, and that will serve you best in the long run, even after any 0% interest periods have ended.